To The Moon

What Is a P/E Ratio (Price-to-Earnings) and How to Use It

The Price-to-Earnings (P/E) ratio is a key metric that tells you how much investors are paying for each dollar of a company’s earnings. It’s like a price tag on profits, showing whether a stock like PLTR at $74.01 (April 6, 2025) is expensive, cheap, or fairly valued compared to its earnings power. Understanding P/E helps you decide if a stock’s worth buying, holding, or selling—especially for volatile names like PLTR with a 400+ P/E. Here’s what it is, how it’s calculated, and how to use it effectively.

What Is the P/E Ratio?

The P/E ratio compares a company’s stock price to its earnings per share (EPS), revealing how much you’re paying for a slice of its profits.

Formula:

P/E Ratio = Stock Price ÷ Earnings Per Share (EPS)

Earnings Per Share (EPS):

EPS = Net Income ÷ Shares Outstanding

Example: If Palantir’s net income is $200M with 2.7B shares, EPS = $200M ÷ 2.7B ≈ $0.074.

Types of P/E:

Trailing P/E: Uses last 12 months’ earnings (historical, more concrete).

Forward P/E: Uses analyst estimates for next 12 months (future-focused, speculative).

PLTR’s 400+ P/E (Motley Fool, April 5) is likely trailing, reflecting low current profits.

Example:

PLTR: Stock price = $74.01, EPS ≈ $0.18 (estimated, based on 400+ P/E).

P/E = $74.01 ÷ $0.18 ≈ 411. You’re paying $411 for $1 of earnings—pricey!

What Does P/E Tell You?

Valuation Snapshot:

High P/E: Investors expect big future growth (e.g., PLTR’s 400+ bets on AI). Common in tech/growth stocks.

Low P/E: Stock may be undervalued or growth is slow (e.g., Coca-Cola’s ~25, steady but not explosive).

Average P/E: S&P 500’s ~25 (April 2025 estimate) is a benchmark.

Investor Sentiment:

High P/E = optimism (or hype). PLTR’s 400+ screams “AI will boom!”

Low P/E = skepticism or stability. JPMorgan’s ~14 reflects reliable banking profits.

Relative Value:

Compare P/E to peers (PLTR vs. Snowflake), industry (tech ~50–100), or market (S&P 500 ~25).

How to Calculate It

Get Stock Price: PLTR = $74.01 (April 6, 2025).

Find EPS:

Check financials (SEC 10-K/10-Q, Yahoo Finance).

Trailing: Last 4 quarters’ net income ÷ shares.

Forward: Analyst EPS forecasts (e.g., PLTR’s ~$0.25 for 2025, estimated).

Divide: $74.01 ÷ $0.18 (trailing) = ~411; $74.01 ÷ $0.25 (forward) ≈ 296.

How to Use the P/E Ratio

Here’s how to apply P/E when analyzing stocks like PLTR:

Compare to Peers:

PLTR’s 400+ P/E vs. Snowflake (200) or Datadog (150). PLTR’s pricier—growth must outpace them.

High P/E is fine if PLTR’s 20–29% revenue growth (Seeking Alpha) beats peers’ 15–20%.

Check Industry Norms:

Tech P/Es: 50–100 (growth-driven). PLTR’s 400+ is extreme, even for AI.

Staples (e.g., KO): 15–25. Lower growth, lower P/E.

PLTR’s P/E suggests it’s overvalued unless AI delivers massively.

Benchmark the Market:

S&P 500 P/E ~25. PLTR’s 400+ is 16x higher—huge risk if growth falters.

Value stocks (Walmart, ~15) are “cheaper” than growth (PLTR).

Trailing vs. Forward:

Trailing P/E (411): Reflects PLTR’s low current profits ($0.18 EPS).

Forward P/E (~296, if EPS hits $0.25): Lower, but still high—assumes 38% EPS growth.

Forward is riskier (estimates can miss).

Spot Trends:

Rising P/E: Investors expect more growth (PLTR’s P/E spiked with 2024’s 350% run).

Falling P/E: Earnings grow faster than price or sentiment sours (PLTR’s 40% drop from $99.01).

Combine with Other Metrics:

P/S Ratio: PLTR’s 50–77x sales (Yahoo, April 1–5) confirms high valuation.

Growth Rate: PLTR’s 20–29% revenue growth needs to justify 400+ P/E (PEG ratio = P/E ÷ growth rate; <1 is ideal, PLTR’s ~15 is steep).

Debt: PLTR’s low debt ($1.25B FCF) supports high P/E—cash fuels growth.

Real-World Example: PLTR vs. KO

PLTR ($74.01):

P/E: 400+ (trailing, $0.18 EPS).

Why High: Low profits, AI hype (36% commercial growth). $74.01 bets on $100+ potential but risks a crash if growth slows.

Use: Compare to Snowflake (P/E ~200). If PLTR’s growth lags, $74.01 is overpriced.

Coca-Cola (KO, ~$65):

P/E: ~25 (trailing, EPS ~$2.60).

Why Moderate: Steady 5–7% growth, 2.9% dividend. $65 is fair for stability, not a bargain.

Use: Low P/E vs. Pepsi (~27) suggests KO’s a better value pick.

April 2025 Context: Tariff scare (Dow -2,200) hit PLTR (13% drop) harder than KO (~2%). High P/E = high risk in bear markets.

Limitations of P/E

No Context Alone: PLTR’s 400+ P/E is “high,” but tech norms (50–100) justify part of it.

Accounting Tricks: Earnings can be manipulated (e.g., one-time gains inflate EPS).

No Profits?: Negative EPS (common in early startups) breaks P/E—use P/S instead.

Ignores Debt/Cash: PLTR’s $1.25B FCF supports its P/E; a debt-heavy firm’s low P/E might hide risks.

How to Use P/E for PLTR ($74.01)

Bullish Case: If PLTR’s EPS grows to $0.25 (2025), forward P/E drops to ~296. At 20–29% growth, $80–$85 is reasonable if AI delivers.

Bearish Case: If tariffs cut growth (April 2025 fears), EPS stalls, and P/E stays 400+, $74.01 could fall to $50–$60 (P/E ~200, tech norm).

Action: Compare to peers (Snowflake’s 200 P/E). If PLTR’s growth outpaces, hold/buy. If not, wait for $65–$70.

Where to Find P/E

Financial Sites: Yahoo Finance, Google Finance, Bloomberg (PLTR’s P/E ~411, April 5).

Brokerages: Robinhood, Fidelity show P/E in stock profiles.

10-K/10-Q: Calculate manually (net income ÷ shares ÷ price).

Why It Matters

P/E is your valuation compass:

PLTR’s 400+: Buy only if you’re high-risk, bullish on AI, and okay with volatility (13% drops).

Portfolio Fit: Pair PLTR with low P/E value stocks (KO, ~25) to balance risk, like our $10,000 mock portfolio (15% PLTR, 15% KO).

Market Mood: High P/E stocks (PLTR) tank in bear markets (April 2025 tariffs); low P/E shines.

In short, P/E shows if you’re overpaying for earnings—PLTR’s 400+ demands huge growth, while KO’s 25 offers stability. Use it to compare, contextualize, and decide.